Amid intense speculation on RBI’s policy rate cut next month, signs of stability in lending rates are becoming stronger. For instance, the increase in MCLR rates slowed down in Q4, FY19 following a steady increase during May and September 2018. Moreover, in March, fresh lending rates fell by 10 bps over the previous month to 9.7 per cent led by drop in lending to criris-hit NBFCs.
“This was driven by 20 bps m-o-m drop in fresh lending rates of PSBs to 9.1 per cent, while it dropped 5 bps m-o-m for private banks to 10.6 per cent. Weighted average lending rates were flat m-o-m at 10.4 per cent, similar to the past eight months,” said brokerage Kotak Institutional Equities.
Interestingly, as per RBI’s system-wide lending and deposit rates, term deposits rates too stabilised to about 6.9 per cent, after increasing at a slow pace in the past few months. The gap between the outstanding loan and fresh loan rates stood at 65 bps. “With a decrease in repo rate by 25 bps in April 2019 and drop in MCLR rates by some banks in May 2019, lending rates will stabilize,” Kotak observed.
Term deposit rates saw upward movement from November, 2017 to March, 2018 by 20 bps to 6.7 per cent, but remained flat thereafter with a marginal 15 bps rise until September 2018 to 6.8 per cent and additional 10 bps over 3QFY19. Similarly, wholesale deposit cost dipped by 20 bps m-o-m in April, while average term deposit rates stood broadly similar to term deposit rates of 1-2 years. “Deposit rates are expected to remain stable over the near term, though gradual rise in the CD ratio might push some private banks to raise deposit rates in an environment of strong loan growth,” Kotak noted.
Consequently, the gap between outstanding and fresh lending rates rose 10 bps m-o-m in March 2019 to 65 bps. The wedge between both stood in the range of 50-70 bps during July, 2018 and March, 2019. While spreads for PSBs increased m-o-m by 20 bps to 85 bps in March, private lenders’ rate gap broadly stood flat at 45 bps. The gradual rise in yields, Kotak said, has led to a situation where spreads between bank funding and bond rates have started to converge.
Meanwhile, the gap between weighted average lending rates and fresh lending rates fell from peak values of 85-95 bps in 3QFY19 to 65 bps. Increase in fresh lending rates is unlikely as most firms focus on higher share of low-yielding retail products and lending to better-rated companies. With gradual revival in lending from PSBs (5 PCA banks exited PCA framework) and flat loan growth at 13-15 per cent, private banks will gradually soften growth trends leading to reduction in CD ratio, which will in turn reduce the pressure on private banks to borrow at higher rates, Kotak reasoned.